Ethics — Study Notes

Mortgage fraud — the two families

• Fraud for housing: a borrower misrepresents (income, occupancy, debts) to obtain a home they intend to live in.
• Fraud for profit: industry insiders engineer transactions to extract equity or fees — typically more participants, bigger losses, and the FBI's enforcement focus.

Classic schemes to recognize

• Occupancy fraud: claiming an investment property will be a primary residence to get better pricing.
• Straw buyer: using a stand-in's identity/credit for the true purchaser.
• Illegal property flipping: quick resale at an inflated price supported by a complicit, inflated appraisal.
• Silent second: an undisclosed second loan covers the "down payment" the lender believes the borrower made.
• Air loan: a loan on a property or borrower that does not exist.
• Equity skimming, churning, chunking — variations on extracting value through manufactured transactions or repeated refinances generating fees without borrower benefit.

Red flags: income inconsistent with occupation, brand-new large deposits, signature variations, a party playing multiple roles, pressure to close fast, appraisal comps that skip nearby sales.

Fair lending concepts

• Disparate treatment: treating an applicant differently because of a prohibited basis — intent matters (overt or inferred).
• Disparate impact: a neutral policy that disproportionately burdens a protected group without business necessity.
• Redlining: refusing to lend (or lending on worse terms) in areas based on their racial or ethnic composition.
• Steering: directing applicants toward worse products or away from neighborhoods on a prohibited basis — also banned by Reg Z when done to raise originator compensation.
• The frameworks: ECOA/Reg B (credit), the Fair Housing Act (housing-related lending), with HMDA data as the monitoring lens. Fair Housing adds familial status, handicap/disability to the protected list.

Kickbacks & fees — RESPA Section 8

• No thing of value in exchange for referrals of settlement-service business; no splitting unearned fees.
• Marketing-services and lead agreements are scrutinized: payment must reflect fair market value of services actually performed, never referral volume.
• Affiliated business arrangements require the AfBA disclosure, no required use, and returns limited to ownership share.

UDAAP

• Dodd-Frank bans Unfair, Deceptive, or Abusive Acts or Practices. Deception is judged by the overall net impression on a reasonable consumer — fine print cannot cure a misleading headline.
• "Abusive" includes taking unreasonable advantage of a consumer's lack of understanding or inability to protect their interests.
• UDAAP is the regulators' catch-all: conduct that slips past a specific rule can still be charged here.

Advertising compliance

• Reg Z trigger terms (down payment, payment amount, number of payments, term, finance charge amount) require the full follow-up disclosures; the APR alone is safe.
• MAP Rule / Reg N: no material misrepresentation — fake government affiliation (misusing "FHA/VA approved" or official-looking envelopes), calling an ARM "fixed," advertising rates that few can actually obtain.
• Include the NMLS unique identifier in advertising; keep records of ads.
• Equal Housing logo/slogan conventions apply to lending advertisements.

Everyday professional conduct

• Never encourage a borrower to leave fields blank or to sign incomplete documents; never "back into" an income figure.
• Correcting a document after signing requires the borrower's involvement — no white-out, no cutting signatures.
• Protect consumer information (GLBA): clean-desk practices, encrypted transmission, share NPI only as permitted.
• Fees must be earned and disclosed; bait-and-switch on terms at the closing table is the canonical UDAAP scenario.